Finance was a major barrier to early wind development when legislation was introduced in 2008 requiring 5% renewable electricity sold on Chile's two largest grids from 2010.
Many projects were blocked by the banks' reluctance to offer project finance. The global financial crisis of 2008-9 and access to long-term dollar debt further threatened support.
But, after a slow start, the sector picked up. The first project to be developed with project finance was SN Power's 46MW Totoral wind farm, backed by Norway's DNB Bank and International Finance Corporation, which began operating in 2010.
Banco BICE, part of Chile's industrial Matte group, followed, financing many renewables projects after it won access to low-cost credit from Corfo, Chile's economic development agency.
The initial focus of Banco BICE was on mini-hydroelectric projects but it soon branched out into wind farms, said project finance manager Rodrigo Violic.
Around eight local banks and financial institutions now finance renewable projects, with a growing number of senior managers providing specialist knowledge, said Esteban Uauy, project finance vice-president at DNB Bank.
A key issue for the banks has been minimising the risks of variable income from electricity sales. With power purchase agreements (PPAs) initially hard to secure, some early projects were financed on a merchant basis, such as SN Power's Totoral.
Developers have looked to Chile's giant mining industry, which consumes a third of the country's electricity, as a potential client. But so far reconciling miners' need for round-the-clock power with the intermittent nature of solar and wind has proved a challenge. Pattern Energy's pioneering deal to sell 70% of the electricity produced by its 115MW El Arrayan farm to the Los Pelambres copper mine could change mindsets.
More promising are the new renewable-friendly rules imposed by the government on tenders held by distribution companies to secure long-term power supplies. Although these PPAs still contain some uncertainty over volumes and tariffs, they go a long way towards providing peace of mind to developers and the banks financing them. Renewables developers touting solar and wind projects won almost 20% of the 11,000GWh awarded at the last major tender held in December. Further in-roads are expected through tenders taking place next year.
With such deals available, merchant projects have become less attractive. "The problem is when a developer expects a high gearing on a merchant project, that is unlikely to happen," said DNB's Uauy.
But after a manic few years of renewables development, the pace of deployment looks set to slow to more rational levels, he said.
Solar projects are edging out wind with lower development costs and quicker construction times, particularly in the sunny north. Poor grid infrastructure in the blustery south mean longer transmission lines, increasing costs and permitting barriers for wind projects.
Chile's poor transmission is threatening banks returns through congestion and curtailment. Rapid development of wind and solar projects has left some parts of Chile's grid oversupplied with power, pushing down spot prices close to zero for a few hours a day.
Lower copper prices have delayed the development of major mine projects, reducing expected power demand.
Fortunately, most renewable projects have PPAs in place, reducing their exposure to market prices. But if the situation continues, grid operators may be forced to shut down plants during peak generation times, cutting revenues for all.
More accustomed to shortages than oversupply, the government has not yet put in place clear guidelines about how it will deal with this situation.